In a market with an external cost,government action
A) cannot decrease the amount of the deadweight loss from the external cost.
B) can sometimes help to achieve an efficient outcome.
C) cannot alter firms' cost curves.
D) Both answers A and C are correct.
E) Both answers B and C are correct.

Question

Quizplus · Accepted Answer

Government action, such as implementing taxes or regulations, can internalize the external cost and help to achieve an efficient outcome where the marginal social cost equals the marginal social benefit. This can reduce the overall deadweight loss from the external cost. However, it is not always possible for government action to completely eliminate the deadweight loss, as it may be difficult to accurately measure and regulate the external cost. Answer A is incorrect because government action can decrease the amount of the deadweight loss, and answer C is incorrect because government action can alter firms' cost curves through taxes or regulations. Answer D is also incorrect. Answer E is partially correct but unnecessarily inclusive.

In a Market with an External Cost,government Action